U15LO2- Compare the difference between variable annuities and mutual funds

No probate (advantage of variable annuities over mutual funds)

- b/c calls for direct designation of a beneficiary, upon death, the asset passes directly without the time and expense of probate

Lifetime Income (advantage of variable annuity over mutual fund)

- choosing a payout option with lifetime benefits gives the assurance that there will be a check every month as long as the annuitant is alive *how much is not guaranteed **This benefit protects against LONGEVITY RISK

Tax-free transfer between subaccounts (advantage of variable annuities over mutual funds)

- investor can transfer from one subaccount to another without any current tax liability

Tax-deferred growth advantage (of variable annuity over mutual fund)

-All income and capital gains generated in portfolio of separate account are free from income tax until the money is withdrawn *Over time can make a significant difference in value of account

IRS Section 1035 exchanges: (advantage of variable annuity over mutual fund)

-Can be exchanged for another annuity without any tax consequences -There may be a surrender charge

Disadvantages to investing in variable annuities compared to mutual funds

-Earnings are taxed as ordinary income, all earnings will be taxed at the higher ordinary income rate -Admin. and insurance fees are typically much HIGHER than the fees incurred by owning a mutual fund - Withdrawals made before age 59 1/2 incur a 10% penalty, in ADDITION to the ordinary income tax -Carry a conditional deferred sales charge. Surrender in the early years will usually involve additional costs

Variable Annuity Features

-Insurance company product -Units -Investment Objectives: Varied -Some guarantees -Redeemed by issuer -Price based on formula -Voting rights

Mutual Fund Features

-Investment company -Shares -investment objectives: varied -No guarantees -Redeemed by issuer -Price based on formula -Voting Rights

No age 70 1/2 restrictions or requirements: (advantage of variable annuities over mutual funds)

-Investor can delay withdrawals, and continue to contribute

No Contribution limits (advantage of variable annuities over mutual funds)

-No IRS ceiling is placed on the amount that may be invested

guaranteed death benefit (advantage of variable annuity over mutual fund)

-Offer an option stating that if the investor dies during the accumulation period, the beneficiary will receive the greater of the current value of the account or the amount invested. *Estate is assured of getting at least the original investment back

Advantages to investing in Variable Annuities Compared to Mutual Funds:

1. Tax-deferred growth 2. Guaranteed death benefit 3. Lifetime income 4. IRS Section 1035 exchanges 5. No age 70 1/2 restrictions or requirements 6. No contribution limits 7. Tax-free transfer between subaccounts 8. No probate

Mutual Fund exchange privilege is:

taxable

Test Sample Question: When comparing mutual funds and variable annuities, it would be correct to state that:

the expense ratio of the variable annuity is usually higher than that of a comparable mutual fund

Variable annuity offers an investor:

the opportunity to have tax-deferred participation in the equity markets *with expenses that are usually higher than a mutual fund with a similar objective

LONGEVITY RISK:

the uncertainty that one will outlive ones money. **THIS IS NOT GUARANTEED INCOME